Banks tipped to use asset sales and share raisings to lift capital

Australia's big banks are likely to sell assets and issue new shares through their dividend reinvestment plans in order to satisfy a predicted toughening in capital rules, fund managers and analysts say.

The financial system inquiry, due to report to Treasurer Joe Hockey next month, is tipped to argue that major banks should be forced to run larger capital buffers to compensate for the advantage they receive from being "too big to fail."

While the recommendations have not been finalised, Fairfax Media reported on Monday it was likely to call for a "substantial" increase in "common equity tier-one capital", citing sources close to inquiry chairman David Murray.

UBS analysts have previously estimated that a 2 per cent rise in capital buffers combined with more stringent rules for "risk weights" on mortgages could lead to a $24 billion capital shortfall across the major lenders.

However, fund managers and analysts say banks have many tools for raising their capital levels and any such changes are likely to be gradual.

Argo Investments senior investment officer Chris Hall said he thought it likely the Murray review would require the major banks to hold about $25 billion more in capital. Such a change would drag on 2017 earnings per share by about 4 per cent, he said, but the impact was likely to be spread over several years.

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"It will have an impact but I think it's going to be measured," Mr Hall said.

Mr Hall said banks could raise the extra capital through a combination of some asset sales and underwritten dividend reinvestment plans: in effect, a "mini capital raising" where banks pay dividends by issuing new stock.

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"I can see underwritten DRPs continuing for a couple of years and there will be some divestment of assets as well," he said.

An investment analyst at Watermark Funds Management, Omkar Joshi, said he believed the Murray inquiry would prompt the big banks to raise more capital through a combination of asset sales, no longer neutralising their dividend reinvestment plans and issuing new shares.

Any new rules from the inquiry may not be binding for several years, but Mr Joshi argued banks would be under pressure to raise their capital levels sooner than that.

"They probably will have to raise, how much will depend on what levers they have to pull," he said. "Even if APRA says you have two or three years to phase it in, the market is going to want it now."

If the major banks did need to issue new shares, Mr Joshi said they would have "no problem" because of strong investor demand for the stock. The big four also make up about a quarter of the ASX 200 index, making them virtually impossible to avoid for large investors.

While some have predicted that the Murray report could result in capital raisings by the banks, contributing to some falls in bank share prices recently, others argue the impact would be more gradual.

White Funds Management managing director Angus Gluskie said the implementation of new rules was likely to be staggered, giving banks time to meet any tougher requirements.

"It's more likely to be a progressive implementation, rather than a massive immediate impact," he said.

Among the big four, ANZ and National Australia Bank had the lowest capital ratios at their latest results.